The Bookkeeper Of Venice

When it first emerged, double-entry accounting was greeted like a great scientific discovery.

By

Edward Chancellor

Nov. 7, 2012 4:24 p.m. ET

Our business heroes are entrepreneurs, inventors and even marketers, rarely accountants. Yet the invention of double-entry bookkeeping, which originated in Italy more than six centuries ago, is one of the great achievements of Western civilization. Without this venerable method of accounting, as Jane Gleeson-White notes in "Double Entry: How the Merchants of Venice Created Modern Finance," it is scarcely possible to conceive of our economic system.

Accountancy has a good claim to being the world's oldest profession. The first accounts can be traced back to Mesopotamia in the seventh millennia B.C., when transactions were recorded by the transfer of small clay tokens. The ancient Greeks were avid record-keepers. So were the Romans, whose Tabulae Rationum were a rudimentary forerunner of double-entry bookkeeping, comprising twin account books, one for debits and another for credits.

It was no coincidence that double entry emerged in its perfected form among the city states of Renaissance Italy. The busy merchants of Venice, Genoa, Florence and Milan were suffering from data overload. Without a method of keeping systematic accounts, wrote the Tuscan mathematician Luca Pacioli in the late 15th century, "it would be impossible for them to conduct their business, for they would have no rest and their minds would always be troubled."

Pacioli was an itinerant teacher and Franciscan friar who started his career as a tutor to the sons of a Venetian merchant. He propagated a new mathematics based on Arabic numerals, which were more tractable to calculation than the old Roman ones and therefore useful in commerce. In 1494, Pacioli published a 600-page encyclopedia titled "Summa de Arithmetica." This book was written in the Italian vernacular, for it was Pacioli's intention that his writings should be accessible to "each and every man." Toward the end of the first volume there is a brief section called "Particulars of Reckonings and Writings," which comprises the first treatise on double-entry bookkeeping.

ENLARGE

Double Entry

By Jane Gleeson-White (Norton, 294 pages, $25.95)

Pacioli describes the painstaking method of bookkeeping alla veneziana. The Venetian merchant, he says, commences by taking an inventory of his stock. Daily transactions are entered into the memorandum and later transcribed into the journal. Accounts are then tallied in the ledger, which has one overarching rule: Every entry must be included as both a debit and a credit. In modern accounting practice, for instance, a new loan is recorded as both a debit in the cash account and a credit in the notes-payable account. The ledger must always balance.

Double-entry bookkeeping was greeted by the kind of ecstatic commentary normally reserved for scientific discoveries. Goethe referred to it as "among the finest inventions of mankind." Why such excitement? For a start, double entry represents a feat of quantification. Every asset or liability and each exchange is given a monetary value and recorded in the same currency. The German sociologist Werner Sombart, author of "Modern Capitalism," a six-volume work of intellectual history published before World War II, went so far as to claim that, by encouraging regular record-keeping, mathematical order and the reduction of events to numerical abstractions, double entry contained the germ of the later scientific revolution.

In his treatise, Pacioli stated that the aim of the merchant is "to make a lawful and reasonable profit so as to keep up his business." At the end of the process, profits and losses are calculated, in Pacioli's words, "from overs or shorts in the debits and credits, and not from actual transactions." Transactions are part of the arithmetic, but profit can be an abstract notion—if goods are sold on credit, any profit recorded at the time will depend on future payment. Even so, an account of profit enables capital to be allocated to activities with the highest prospective return.

Double entry also fostered an ethical dimension to market-based transactions at a time when the Catholic Church took a dim view of profit-seeking. Pacioli recommended that merchants "begin their business with the name of God at the beginning of every book." Well-kept accounts improved a merchant's credit and provided a testament to character. Good accounting and moral rectitude have always gone hand in hand.

Ms. Gleeson-White's narrative in "Double Entry" is clear and approachable. The complexities of accounting are lucidly presented. On the debit side is the author's tendency to hyperbole: Europe is alternatively "rocked" and "catapulted" by historical developments. There are some inaccuracies, too. She mistakenly describes as "peaceful pilgrims" the Crusaders who sacked Constantinople in 1204. Nor is it correct that the joint-stock company in the early 19th century was a "new form of business organization." By that date it was more than two centuries old. "Double Entry" also loses its focus as it approaches the present—an attempt to link double-entry bookkeeping to the failure of our national accounts to incorporate environmental costs doesn't come off.

Nevertheless, "Double Entry" provides an accessible introduction to this key development in the history of capitalism. Perhaps the most remarkable aspect of the double-entry method has been its durability. It has survived centuries of commercial evolution, from the Italian merchant houses to modern multinational corporations. From a top-down perspective, the market economy often appears unstructured. At the micro-level, however, double entry provides the necessary order. A sound economy is one in which accounts are properly maintained, where credits exceed debits and capital expands. The accountant who balances his books with care and integrity turns out to be just as important to our material well-being as the much-vaunted entrepreneur.

Mr. Chancellor is the author of "Devil Take the Hindmost: A History of Financial Speculation."

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